Notes from Larry Robbins, Jim Chanos, Carson Block, Jeff Smith, David Einhorn and many more from the 2016 IRA Sohn Conference. These are extensive notes we also have prior ones here but got another set so in case we missed anything readers can see it below.
Prior set -> SEE THE FULL CONFERENCE HIGHLIGHTS HERE-> LINK Edition #1
Charlie Munger: Invert And Use “Disconfirming Evidence”
IRA Sohn Investment Conference 2016 – Larry Robbins
“Get a grip – benefits of hanging on”
- Hedge funds have had a rough ride – getting criticized by everyone
- Investors have been going “tubing”
- Stocks go from point A to point B – tracking earnings and multiples
- On the way, there are waves of uncertainty and doubt – be they fundamental or macro or tactical – follow where the boat is going and not the waves!
- Recent “waves” – China, oil, drug pricing, elections, monetary policy, Zika, inversions, antitrust, high-yield, liquidity, positioning, new economy (Airbnb)
- VCA: Boat has been going up and to the right, but multiples have come in. Was down 14% in a day in February because an article said “a large HF, one of the largest holders, was getting redemptions.” The article was about us and it wasn’t even true!
- TMO: We’ve owned this for 12 years. “I don’t want to give hedge funds a bad name, but occasionally we invest!”
- Anthem – managed care is a good biz. Will merge with Cigna in accretive transaction. Tons of dry powder. If deal doesn’t happen they’ll do something productive with that cash. Market is assigning a 1/3 chance it happens. We own both Anthem and Cigna. If deal doesn’t close we think both stocks go up from fundamental appreciation. People are worried about antitrust. If you look at public policy initiatives – they’d want this to close! Most small co-ops have gone bankrupt.
- Abbvie from last year – we got thesis right and the stock is down 1%.
- Brookdale – down 50% with FFO down 15% – feels extreme to us.
- IN CONCLUSION: Don’t throw the baby out with the bathwater. Our portfolio is full of “cheap boats.”
IRA Sohn Investment Conference 2016 – Carson Block
“We don’t believe in Santa Claus, 7% GDP growth in China, or rapidly expanding low-risk banks”
Short idea: OZRK – Arkansas
- “There is no such thing as alchemy in banking”
- 45% 3 year loan book CAGR, 93% 3 year off balance sheet liability CAGR
- 90% real estate loans – outsized exposure to single projects
- Extreme concentration in construction
- Overconfident management: “I can take my top 10 guys and match them with JPM’s top 10 guys and feel pretty good about our chances of winning that battle” Q1’10 call
- “Ass-backward” business model: let’s keep making loans and we’ll acquire banks and sell off assets in order to have deposits, and we can find the loans that way. Requires bigger and bigger acquisitions to grow – went from doing deals in Arkansas to SF/NY, biting off more than they can chew.
- Construction lending as a % of total is 35%, next most concentrated company is 18%. They make outsized loans relative to assets.
- Construction loans are risky – unfinished projects can have massive haircuts.
- Basel III will require loans to be risk weighted at 150%. They’re risk weighting their own book at 65-75%.
- Real estate cycle is long in the tooth – 1Q16 slowing in NY – lowest property volumes since mid-2014. Miami slowing as well.
- Banks should be increasing provisioning as cycle goes on. OZRK has them going lower as % of assets.
- Funding costs have gone up. $6.1B pending of asset acquisitions. We expect capital raises in both 2016 and 2017.
- Using 2014 provisioning rate, Q1 2015 EPS would be down 15%, Q1 2016 down 26%
- Way more unfunded commitments than other banks. Nearly lowest provision rate.
- On top of all this, management compensation growing like a weed.
- “At best, unsustainable earnings – at worst, inadequately capitalized.”
IRA Sohn Investment Conference 2016 – John Khoury – Long Pond Capital
Hyatt – 65% upside
- Hotels are out of favor as an asset class
- Lodging is most out of favor in real estate due to worries over Airbnb
- Lodging stocks have underperformed REIT index by 30% over the past year and are as cheap as they’ve ever been using implied cap rate spread vs major sector average
- Not all hotels are the same – the multiple changes depending on type – suburban, airport, urban, resort etc.
- Some will be hurt more than others. Hyatt’s profit pool is safe but has been thrown out, baby with the bathwater.
- Hyatt has traded in lockstep for past year with (company B) Hyatt has 1/3 leverage as B, and 3x daily rate. Yet trades at same EBITDA multiple (9.6x)
- Why Hyatt?
- Low leverage. Quality assets. Pritzker family controls company – never gives guidance – business is not run for quarterly earnings. Not meant for short term investors. They have $4B of capital invested alongside us. 45% of EBITDA is franchised, rest is a high-quality superior portfolio. Vast majority of Hyatt hotels you see out there are not owned by Hyatt.
- Public comps trade at 13x – IHG and Choice and consolidation is happening.
- 55% is owned real estate. 41 hotels. 20000 rooms. $218 average daily rate. Can do asset by asset valuation.
- Comps: intercontinental Paris, baccarat, strategic.
- Top 10 hotels worth $655k per key or $3.1B. Rest is worth $260k or $3.9B. $7B total. Add $5.4B for franchised portion gets you to $11.5B gross asset value or a $79 stock (65% upside)
- Bonus: aggressive share repurchases – “eventually there will be no float left.”
IRA Sohn Investment Conference 2016 – Jeff Smith – Starboard
- Nucynta franchise and a few others
- Has not taken egregious price increases – price follower rather than leader
- At competitive disadvantage due to lack of scale – this and the desire to remain independent pushes them to make poor capital allocation decisions.
- Business is attractive to a strategic – reduce overpriced debt – easy synergies could more than double EPS
- HZNP offered a 60% premium for DepoMed at $33/shr – the stock now trades under $17/shr. Did DepoMed even engage with them? No. They took highly aggressive defensive measures – poison pill – and also sued Horizon. We were concerned their interests lay in staying independent.
- In past month, these fears have been confirmed. They wanted to reincorporate in Delaware. Hidden in the proposal were some meaningful provisions reducing shareholder rights. Eliminated abilities for shareholders to replace board members.
- We think the company is substantially undervalued and intend to replace existing board.
Long WRK (Westrock)
- Paper and packaging. Defensive business. Stable end markets (consumer staples). Significant non-core resi and real estate holdings. Spun off a spec chem business recently.
- Trades at $37/shr – excluding spin, 4.9x next year’s EBITDA and 15% FCF yield.
- Macro concerns weighing on stock. Sold off with commodities. Containerboard price down 2% and people are concerned prices go lower. These concerns are overblown. Given how cheap it is, the current price implies more than $125/ton decline in containerboard, which is unprecedented.
- No emerging market exposure – packaging is local – US demand is strong and the packaging business is less commoditized than people think. 80% of revs are domestic. Significantly consolidated industry. Many highly levered players kept producing in 08-09 to service debt, but now, more rational environment. Post spin-off, investors will focus on value of core biz.
- Worth $71/shr total to us as company pulls levers (monetizing non-core real estate/buybacks)
IRA Sohn Investment Conference 2016 – Chamath Palihapitiya
Amazon is a $3T company by 2025. 24% IRR
Retail = $1T. AWS = $1.5T. Bets and cash $.5T.
Retail assumptions ($1T in 2025)
- 10% customer growth CAGR to 788m in 2025
- Prime: 20% CAGR – members to 286m by 2025
- Unit volume growth at 17% CAGR to 2025 to 30B units.
- 2025: 30B units times $34 per unit. 2025 GMV of $1T. 5% EBIT margin. Use WMT or COST EBIT multiple of 20x to get to $1T valuation.
AWS assumptions ($1.5T in 2025)
- Costs on AWS are best in class at much smaller scale. Fastest growing companies we own, all use AWS. Majority of new workloads will use AWS. AMZN expands the market: “Tax on the Internet and innovation”
- Global IT spend is $3T. 2025 will be $2T. What Bezos did to retail, he’ll do in IT.
- 700 feature improvements last year. 40% y/y. 50 price cuts – 2 per month
- AWS – $432B of revenue in 2025 at 30% EBIT margins. $130B EBIT at 12x EBIT = $1.5T EV.
Bets and Cash ($500B in 2025)
- Look at AMZN’s reported EBIT margins vs GMV – they were up to 5% EBIT margin for years. Using that as baseline, AMZN has invested $18B of investment on our behalf since 2005. Bezos has turned every cost into a source of revenue. Look at 2005 P&L line by line. Bezos works diligently to not only bring each cost down but profit from it eventually (think AWS)
- What’s the EV of that $18B? He’s created $239B of value or 33% compounding. In addition, AMZN now has two trillion dollar monopolies – AWS and retail – as ready customers for any new vertical Bezos enters.
- We assume 15% compounding going forward and add cash generated to get to $500B.
IRA Sohn Investment Conference 2016 – Richard Deitz
- Pitched Greek banks and Government Bonds
- Bullish on Greece
- Deitz: “Greece seems to be to financial risk what Steph Curry is to the three-point shot”
- Catalyst for greek bonds is that the ECB likely will include them into its QE program. Potential for 33% return on Greek 10-year.
- Deitz argues bank stocks & govt bonds in #Greece are ‘cheap’ and should rise following review of 3rd bailout program.
- Deitz: Of all the Greek banks, we like Alpha Bank the be
- Deitz: banks in #Greece overcapitalized & may eventually return 25%+ of current capital to investors. His favorite? Alpha Bank
- Deitz likes GGB strip bonds as part of a bull case on Greece
IRA Sohn Investment Conference 2016 – Stan Druckenmiller
- When I started Duquesne in 1981, RFR was 5%. 5-year was 15%. Assets were priced cheaply to compete. This 15% hurdle forced corporations to invest wisely. This led to one of the greatest bull markets in financial history. Today is the mirror of that. How can this market be a good investment?
- Today: there is no alternative – “TINA.” The best is behind us. There is no room to increase leverage. US total credit market debt to GDP is 375%. Was 160% in early 1980’s.
- We are deep into longest period ever of easy monetary policy. Using Volcker or Greenspan eras as baseline, we’re four standard deviations away from normal Taylor rule. Fed is borrowing from future consumption. We have the most negative real rates in the G7.
- I was here in 2005 – I argued that the Greenspan Fed was sowing the same seeds. Today’s are much worse. The obsession with short term stimuli contrasts with when I started my career. Volcker would take near term pain for long term gain. They raised rates 200 bps overnight. The turbulence he engineered led to a surge in growth and a 25-year bull market. These guys today want to spoon-feed you what they’re going to do a few months before they do anything, and if the S&P falls, they withdraw it. Five years ago, you could’ve argued they wanted escape velocity post-recession. It’s been eight years now – that theory is gone.
- “The Fed has no endgame” other than avoiding a 20% S&P decline or another recession. They are raising the odds of economic tail risk. At the government level, politicians are ignoring badly needed entitlement and tax reform.
- Peak in profits is past. EBITDA declining as net debt goes higher. This 5-year divergence is unprecedented. All this debt is going towards buybacks and not capex.
- “You can only live on your seed corn for so long.” Corporate sector today is stuck in a vicious cycle – low productivity, declining margins, and growing indebtedness. And we’re paying 18x for that.
- I was bullish three years ago. Now I’m bearish. We’ve borrowed from our future. It’s hard to avoid comparisons to 1982. Market sold at 7x earnings with rising productivity and rate cuts on the horizon. Now we have declining productivity and no ammo on interest rates. Risk/reward is negative without lower prices or structural reform, and the second one ain’t happening. Policy makers have no end game. Markets do.
IRA Sohn Investment Conference 2016 – Jeff Gundlach
- Negative interest rates – there’s $7.8T of negative yielding bonds
- NIRP isn’t working – it does nothing in terms of weakening currencies. Doesn’t help stock markets either. Prior stimulus did. GDP is going down as well.
- NIRP is deflation. You have $100 today that’ll be worth $98in five years. That’s deflation. “Fighting deflation with negative rates is like pouring gasoline on your burning house.”
- Trade idea: Buy mortgage REITs and short utilities against it – low mortgage multiples relative to history. You also make 8% on the spread. Leverage it and get 15%.
- Trade idea: short “low volatility equity” ETFs. “Oxymoron if I’ve ever seen one”
IRA Sohn Investment Conference 2016 – Zach Schreiber – Point State
“End of bull market is unsustainable equilibria”
Short the Saudi riyal
- Saudi Arabia’s breakeven price on oil is going up due to social programs, and on the other end, we’re long term bearish on price of oil.
- Saudi fiscal breakeven is $90/bbl. Factors are pushing this up: demographics (“youth bulge”), defense spending, social program. Unsustainable. Currency peg is massively overvalued. Can buy MXN/RUB to make the trade carry-neutral.
- FACTORS PRESSURING CRUDE DOWN
- Pressure 1: 12-15 years of shale oil inventory at $50-55.
- Pressure 2: China debt/GDP
- Pressure 3: Fed rate normalization
- Pressure 4: Electric cars will cause demand displacement
- FACTORS PRESSURING SAUDI ARABIA’S COSTS UP
- “Rough neighborhood.” 5 governments overthrown. 11 saw social upheaval. Expensive to maintain current status: Saudi is, for now, relative bastion of stability, but at increasing financial cost.
- 11m population growing 8% per year. Salary expenditures have doubled. More than half the population is under 25. Salary expenditures are half their budget. Defense is 1/3 of the budget. They’re in armed conflicts all over the Middle East. The US just struck a nuclear deal with their enemy Iran – the US is no longer their best friends. Obama openly has said as much – the Saudis heard it for sure. In sum: expenses are going up.
- FX reserves of Saudi bank:
- $587B in reserves but a huge balance of payments problem. Already down $160B.
- At $50 crude long term, they’ll burn $80-100B per year. Mid-2020 they’ll hit IMF threshold.
- Balance sheet is overstated and misunderstood. That $587B is just assets. There’s also $340B of liabilities! So there’s only $260B in equity. That $340B is other people’s property – REAL liabilities.
- At market price for crude, that’s a $90B annual fiscal deficit. 2-3 years of runway before it hits a wall.
- How are they countering this?
- Issuing tons of debt. 3-month SAIBOR is skyrocketing.
- They can’t cut production because they’ll lose market share.
- Twitter rules in Saudi Arabia. It’s the most penetrated Twitter market in the world. So you can see how fiscal austerity is being received – not well.
- Saudi Aramco (they want to IPO 5% of company at $2T valuation) its only worth $2T if the liabilities are funded – they can’t separate it from $7T liability. They’re structurally insolvent in a few years. Negative equity value of $5T. If they sell the golden goose, how do they fund anything??
- Who holds the bag? Normal citizens and foreign investors.
- Persistent capital flight – losing $60-70B per year. They need to attract $4T in FDI, which is 20x the amount they attracted during the boom of the last decade. There’s no FDI coming in.
- The cost to hedge this risk is 1.25% – if you own MXN and RUB, it’s carry neutral. I don’t find trades of this positive convexity anywhere in the market.
- Timing the trade – if I had a crystal ball then I’d wait. In the meantime, capital controls could intensify.
- This is like the subprime bet. Saudi banks consider 1.25% as free money.
- We do hope the Saudis do the right thing: They need to re peg lower. Preserves fx reserves. Narrows deficit. Encourages FDI. Discourages flight. Lower unit labor costs. More monetary policy flexibility.
IRA Sohn Investment Conference 2016 – David Einhorn
- Mining capex is going lower. Coal consumption is in secular decline. Iron ore is crashing as well.
- Mining capex down 49% but last cycle was down 70%+ from peak
- Iron ore – steel has been sleepy forever ex China
- Rail capex declining as well – segment EBIT should drop several hundred million in next few years
- Estimates $3.50 in FY16 EPS. $2.00 in FY18 (trough). 50% downside.
- GM: normalized North American SAAR of 15.8m. Comes out to 327k cars less for GM.
- GM bears worry about ridesharing. “These people mostly live in very tall apartment buildings… It’s easy for people who don’t own cars to think about lives without cars. We don’t think it’ll have a material impact on sales soon, or maybe ever.”
- China: 15-20% of EBIT. Sales of cars will grow 6% a year through 2020. Consumer driven economy. 2020: China net income of $2.7B
- Valuation: normalized/mid cycle earnings will be similar to 2015. Decline in North America will be made up by China and other international segments. $4.95 = normalized eps. Buybacks will boost EPS – by 2018, the same net income could do $6.00 in EPS. “There’s magic to a 6 P/E and a big buyback.”
IRA Sohn Investment Conference 2016 – Jim Chanos
“A situation in sub-Saharan Africa”
- In 1990 the publicly traded miners had annual capex of $6B per year. Half of that is the cost of the hole, the other half is cost of equipment. In 2001, it was $14B. 9-10% compounded, pretty nice growth. From 2001-2012, when China began urbanization, capex went from $14B to $122B per year. Basically, an arithmetic function went to being a geometric function. It’s come off a bit but has a long way to normalize. How does this apply to Africa?
- We all think of Australia and Canada – but Africa is really dependent on commodities. They’re not developed. They hope to get there, but China is pulling back from Africa.
- South Africa is caught in a macro storm. China is your biggest trading partner. You have big political problems. Looming credit downgrades. Currency depreciation. 53% youth unemployment. Monstrous debt load. Widespread corruption. Jacob Zuma has run the ANC as a fiefdom and there are corruption investigations.
- Nigeria is in even worse shape. Wholly dependent on oil – 75% of export income. Currency plummeting despite a peg. Widespread corruption. Terrorist threats. 13% inflation. Outright war going on with Boko Haram and they’re running out of FX reserves. If oil stays here they’re going to have a big problem in 2-3 years – way greater magnitude than Saudi Arabia. Nigeria is basically a failed state.
Short Idea: MTN Group
- 62% of revenues and 72% EBITDA from South Africa and Nigeria. Fairly large company ($20B). Recently, sub adds have turned down. Price competition is increasing. No more protected licenses.
- Wall Street thinks it’s an anomaly and not a trend. It’ll continue declining.
- More problems: intermittent network outages. ARPU is declining.
- They have EBITDA margins of 50% in Nigeria and 30% consolidated. This is way ahead of peers and unsustainable. Every 10% cut will wipe out 25% of pretax income and shareholder profits perhaps down 30-50%. I think this is a given.
- It looks cheap at 5x EBITDA, but there’s no valuation cushion. This company could trade at 3x or 4x on much lower EBITDA.
- They’re converting less and less of their EBITDA into cash as time goes on. It won’t be a liquidity problem immediately but it could happen. The cost of doing business is only going to grow.
- Beyond that, Nigeria is going to extract money from them soon. And you should see their other customers: Iran, Ghana, Ivory Coast, Cameroon, Uganda, Syria.